Today I am looking at why I believe Unilever (LSE: ULVR) (NYSE: UL.US) is ready to surge northwards.
Emerging markets strike back
Fears of economic cooling in developing regions has hampered investor sentiment in recent weeks. However, Unilever’s full-year results release recently suggested that such fears may be vastly overblown — sales jumped an impressive 8.7% in 2013, the company announced, with demand actually improving strongly in recent months. Growth of 8.4% during September-December was up markedly from 5.7% in the previous three-month period.
“Growth here remains well above that in the developed world and will continue to do so,” chief executive Paul Polman commented, adding that the firm will “therefore [be] accelerating our investments in emerging markets” to fulfil its growth strategy.
Four-fifths of the world’s population will live outside the US and Europe by the turn of the decade, Polman suggested, where the effect of rising populations and galloping personal affluence levels look set to drive demand for consumer goods skywards.
Margin improvements bolstering bottom line
But even if Unilever suffers the consequences of wider economic pressure on consumers’ spending power, investors should take heart in the firm’s ability to keep margins running at a rate of knots and consequently keep earnings ticking higher.
Indeed, the firm announced that the effect of “strong margin accretive innovations and active cost management” pushed core operating margins 40 basis points last year to 14.1%. Unilever can rely heavily on the formidable pricing power of its star brands — from Cif cleaning products through to its VO5 hair range — to keep margins moving in the right direction.
Steady withdrawal from stale Food products
Although Unilever posted sales growth across all of its divisions last year, turnover at the company’s Food section continues to drag on overall group performance. Underlying sales here advanced just 0.3% in 2013 versus group sales growth of 4.3%, with divisional volumes actually dipping 0.6% during the period.
The business has had to rely heavily on widescale marketing and heavy promotions in order to retain even meagre sales expansion, so signs that Unilever is stepping up the demolition of its Food arm should boost the balance sheet and strip out underperforming assets.
Indeed, the company followed up the sale of its Wish-Bone and Western dressing brands and Skippy peanut butter label in recent months with the sale of its Royal Pasta range to RFM Corporation in January. I expect more sell-offs to transpire in the near future.
